Written by J.P. Wicklein

     I picked up a book recently entitled “The 5 Lessons a Millionaire Taught Me” by Richard Paul Evans.  At 106 pages, it’s a pretty quick read.  For a small book it packs a lot of useful advice. 

Win in the Margins

     One of the author’s five lessons is to “win in the margins”.  What does that mean? It means this:  To become wealthy you need to find ways to increase contributions to your growing nest egg.  Not through your 9 to 5, forty hour a week job but through other endeavors.  Figuring out what your money making endeavor will be is the hard part.  If you spend enough time thinking about your passions and determining what you’re good at, sooner or later you’ll settle on your money making idea. 

Invest Your Proceeds

     As you earn money from your side venture be sure to save the vast majority of your profits.  Your day job is what you’ll use to pay your bills, support your family, etc…  Proceeds from what you earn on the side need to be invested.  Let’s assume that you find a way to earn an extra $5,000 each year.  If every year you take the entire amount and invest it an index fund that earns 10% annually you’ll wind up with $100,000 twelve years later.  Keep it up for 30 years and you’ll pocket over $800,000. 

Do something you really enjoy 

     If you choose a side venture that you’re not passionate about chances are you won’t stick with it long enough to earn $800,000.  Instead, you’ll quit well before you accumulate any substantial sum.  If, however, you find a way to profit from your passions it won’t seem like work at all.  That’s “winning in the margins”.

Written by J.P. Wicklein

     I read an article in Time last week advocating the death of the 401k.  Their rationale was that 401k’s are failing to prove themselves as an effective retirement savings vehicle for the masses.  In light of the recent financial meltdown the argument to replace the 401k with another retirement savings vehicle, such as a federally-controlled pension system, has gained attention.  Although there may be rationale for providing a government-controlled retirement savings option, beyond Social Security, eliminating the 401k would be a travesty.

Why 401k’s are awesome

     Through a 401k workers can save their pre-tax earnings in an individual retirement account.  All contributions, and earnings, are not subject to any tax until they are withdrawn.  (Note:  This applies to a traditional 401k, a Roth 401k offers separate, distinct advantages.)  Why is this that a good deal?  The primary advantage of a 401k is that it allows you to earn money on income taxes that you would’ve otherwise paid to the government.  In the end the ability to fund your 401k with pre-tax earnings, and avoid paying income taxes until withdrawal, can cause modest contributions to balloon into astounding sums.

     Consider this:  If someone contributed $5,000 every year to their 401k for 40 years they would have saved $200,000.  That savings, earning 10% annually (the historical long-term return for stocks) would balloon to over $2.2 million. 

     An additional benefit of the 401k is that you, not the government, controls the money in your 401k account.  You decide how much to contribute, what to invest in, and when to withdraw your funds.  Ironically, the ability to control that much of your 401k is exactly why some think it should be replaced with a government-controlled retirement system.

Why people think 401k’s suck

     The problem with the 401k is that people are ignorant.  A sizable number of people lack the commitment to regularly contribute enough money to their 401k and, the willpower to resist tapping into their funds until retirement age.  Further, lots of people don’t know what to invest their money in.  As a result, many Americans are reaching retirement age with nowhere near enough money to last them the rest of their lives.

     For example, during the financial meltdown that occurred last year many older Americans that were heavily invested in stocks saw their retirement accounts drop in value by as much as 50%.  As a result, many were forced back to work or had to cut back on their lifestyle.  Had they invested appropriately those same individuals would’ve only had a small portion of their portfolio in stocks. 

     Whether they were too ignorant to know better, or too greedy, the outcome was the same - they lost a lot of money.  (A good portion of their losses have been recovered as stocks bounced back during 2009.  Unless they got scared and sold when the market was abysmal, thereby missing out on the recovery – which many people did.)  That, among other reasons, is why some are advocating replacing the 401k with a government-controlled retirement system. 

Lowest common denominator retirement system

      As much as it disappoints me, I’m starting to accept the fact that many Americans are ignorant.  They lack the education and willpower to control their own financial future.  For these people it may be appropriate to cede control over their retirement funds to the government, like a helpless child submitting to the authority of their parent.  My concern, however, is that those that are intelligent and responsible enough to appropriately take advantage of the 401k, or other retirement vehicles, will be hurt by the ignorance of others.  If the 401k were to be taken away, and replaced by a mandatory, government-controlled retirement system, it would force the capable to be punished for the flaws of others. 

     Although it may be best to provide a government-controlled option, it would be wrong to deny other Americans the freedom to manage their own retirement savings in the process.

Photo by: A.M Kuchling (altered by J.P. Wicklein)   

Written by J.P. Wicklein

     I came across a segment about the future of Berkshire Hathaway after Warren Buffett dies.  Due to Buffett’s advanced age, he just turned 79, the Berkshire Board of Directors often discusses potential successors.  The Bloomberg feature discusses a couple possible contenders to take over the $156 billion company.  (Try not to get hypnotized by the tickers.)

 

Written by J.P. Wicklein

     I’m earning over a 9% return on my money through Lending Club.  (Currently the average annual return for all of Lending Club’s 25,000+ investors is 9.6%.)  By offering a $25 bonus, Lending Club is inviting new customers to give their service a try for free. 

What is Lending Club?

     Lending Club acts as a middleman between individual lenders and borrowers seeking loans between $1,000 and $25,000.  To qualify for a loan, borrowers must have a credit score of at least 660 and meet other Lending Club guidelines.  Once approved, borrowers are categorized into one of 35 loan grades and assigned an interest rate (with the lowest interest rates going to the most qualified borrowers). 

     Lenders (investors) browse Lending Club’s website or use its “Lending Match” tool to select loans they’d like to fund.  Typically, investors will buy small, $25 stakes, in a large number of loans – enabling them to diversify their risk.  Investors profit as borrowers steadily repay their loan.

Invest in a loan using your bonus

     After signing up, Lending Club will credit your account with a $25 bonus.  You can use that money to invest in any of the loan requests featured on Lending Club’s site.  Here’s an example of what it looks like when you’re searching for loans. 

     Using their filters, you can choose to invest in very conservative loans (folks with credit scores over 780) or, seek a slightly higher return through borrowers with a lower (but still high) credit score.  The great thing about Lending Club is that even the most conservative loans still pay almost 8%. 

     If you’re interested in taking advantage of Lending Club’s trial offer click here or on the logo above.

Written by J.P. Wicklein

     Dime Bank recently announced $300 in bonuses for new checking account customers.  I’ve seen checking account incentives up to $100 before, but never anything this high.  Dime Bank has put several conditions in place to receive the full bonus.  Here are the details: 

·         New Dime Bank customers that open a “Prime Dime Rewards Checking” account receive a $100 bonus at time of opening, another $100 for setting up monthly direct deposit, and $100 more for completing two online bill payments.

·         The bonuses for setting up monthly direct deposit and completing two online bill payments will be paid 6 months after account opening.

·         You must keep the account open for 6 months.  If you close the checking account before 6 months any paid bonuses will be deducted from your account balance.

·         The minimum opening balance is $1.

·         There is a $15 monthly fee if the average daily balance drops below $5,000.  (For balances over $5,000 the APY is 0.50%.)

·         The offer is limited to 1 per household.

·         The promotion runs until 11/15/09.

·         All bonuses are reported as taxable interest on IRS Form 1099-INT.

 

     Dime Bank’s terms are more restrictive than most.  If you can deal with them, though, you’ve got yourself an extra $300.  For more information on Dime Bank’s offer click here. 

Photo by: meddygarnet 

Written by J.P. Wicklein

     My sixteen month streak avoiding any illness has come to an end.  I was diagnosed with strep throat today.  While I was sucking on a throat lozenge I decided to write an article on healthcare flexible spending accounts. 

What is a flexible spending account?

     There are different types of flexible spending accounts (FSA) but the one I’m referring to pays for certain medical expenses not covered by health insurance.  Most often, flexible spending accounts are provided by companies as an elective benefit to their employees.  Employees fund their flexible spending accounts through pre-tax payroll deductions throughout the year.

Why should I use a flexible spending account?

     The beauty of a flexible spending account is that it allows you to pay for medical expenses with pre-tax dollars.  In short, if you’re in the 25% tax bracket this means eligible medical expenses will cost you 25% less. 

What can I pay for with my flexible spending account?

     As mentioned above, flexible spending accounts can be used to pay for healthcare expenses not covered by insurance.  Some examples of eligible expenses include deductibles, copayments, glasses, contact lenses, and over-the-counter drugs.  This week I used my flexible spending account to pay for $43 in prescription drug deductibles.  Previously I’ve used FSA funds to buy glasses, aspirin, and Nyquil. 

     Allowable expenses vary depending on the plan so be sure to check with your employer for a complete list. 

Flexible spending accounts are easy to use

     In prior years, I’ve had to fill out a form and fax in claims to receive reimbursement for eligible expenses.  Last year, though, my company implemented a debit card system.  Instead of having to mess with any paperwork I simply pay for my expenses with a MasterCard debit card.  (Just in case I hang onto all my receipts.)  The high costs associated with handling all the paperwork has caused many FSA administrators to adopt a debit card system.  Chances are your employer’s plan operates under a debit card system as well. 

Use it or lose it

     There is an area of caution surrounding flexible spending accounts.  You must use all of the funds in your flexible spending account during a specified period of time – usually one calendar year.  Any remaining, unspent funds will be forfeited.  To ensure this doesn’t happen to you I suggest budgeting conservatively when determining how much to contribute to your FSA. 

     Assuming you budget appropriately flexible spending accounts can save you money.  It sucks getting sick but saving money on your healthcare should help ease your pain. 

Photo by: Paul Keleher 

Written by J.P. Wicklein

     Uncle Sam is hurting for money.  Currently the U.S. is facing a staggering $1.6 trillion budget deficit.  Add on to that the incredibly expensive, and increasingly insolvent, Social Security and Medicare programs and the picture is even worse.  To close the deficit, and continue to fund future obligations, the federal government will almost certainly raise income taxes. 

Income tax rates change

     Since the federal government implemented an income tax in 1913 they’ve consistently changed the rates.  The chart below shows the evolution of income tax rates for the highest and lowest tax brackets.

     In addition to raising income tax rates, the government can take more money out of your paycheck by redefining the tax brackets or removing popular exemptions – like the homeowner’s mortgage interest deduction.  No matter how they do it the fact remains the same – the federal government needs more money and they have the power to get it.

What this means for your retirement savings

     With rates likely on the rise you may want to pay taxes on more of your retirement savings now by contributing to a Roth IRA or Roth 401k (as opposed to a traditional 401k or a traditional IRA).  With a Roth your contributions are made with after tax dollars, however, your contributions and gains come out tax free. 

Photo by:  infrogmation

Written by J.P. Wicklein

     Complaining about a poor customer experience is an excellent way to save a few bucks.  Often companies will offer you an incentive to keep you happy – whether you’re in the right or not.  By complaining about a pair of bad experiences recently I received a $20 grocery store gift card and a $10 Amazon coupon code. 

The grocery store

     Last week I accidentally missed a sale on Diet Coke by one day.  The new price was $1.49 higher.  I asked the customer service desk if they would honor the old sale price.  They refused.  I retaliated.  I emailed the grocer, through their website, complaining about my experience.  Within a few days I received a phone call from a woman at their corporate office.  She informed me that the store should’ve honored my request for the old sales price.  To make up for my experience the store gave me a $20 gift card.   

Amazon

     A few weeks ago I wrote about my quest to buy a specific TV for the lowest price possible.  After reading your comments it appeared I was successful.  A couple weeks after the article, though, Amazon dropped their price $100.  Unlike many brick and mortar retailers, Amazon won’t refund the difference.  After getting nowhere with Amazon’s customer service department I decided to file a complaint with the Better Business Bureau.  A representative from Amazon’s corporate office responded to my complaint and held firm.  Although she refused to honor my request to refund the $100 difference she did offer me a $10 promo code on my next Amazon purchase. 

The bottom line

     I’m not suggesting you lodge a complaint every time you make a purchase.  The next time you feel slighted, though, don’t just take it.  Let the company know how you feel.  If, at first, you don’t get the response you’re seeking, escalate.  Ask to speak with a supervisor.  If that approach doesn’t work file a complaint with the Better Business Bureau (it’s easy).  You may not get everything you’re looking for but chances are you’ll walk away with a little something extra. 

     What about you?  Did you ever complain about a bad customer experience?  Were you offered something as a result of your complaint?  Add your comments below!

Photo by:  katiebate 

Written by J.P. Wicklein

     I received an email the other day notifying me of a 90% discount Restaurant.com is offering on all their coupons.  This promotion means that you can pick up a $25 coupon to one of your favorite restaurants for only $1. 

What is Restaurant.com?

     Restaurants all over the country offer coupons for sale on Restaurant.com.  Typically a $10 coupon can be purchased for $4 and $25 coupons cost $10.  Other, higher denominated coupons, are also available for purchase. 

Discount codes

     Often, Restaurant.com will offer special discount codes, through email, to their customers.  The discount codes are steep - sometimes as much as 80% off.  Earlier this week Restaurant.com offered a rare 90% off discount code, “NINETY”.  With a 90% discount code a $25 coupon will only cost $1, a $10 coupon runs $0.40.  The current 90% off promotion only runs through September 13^th.  Don’t worry if you miss it, though, hefty discount codes are emailed out several times a month. 

Restrictions   

     Take note of any restrictions before purchasing a coupon on Restaurant.com.  Most restaurants require a minimum purchase amount.  Additionally, some are only valid during certain times of the day or week. 

My experience

     Using a discount code, my girlfriend purchased a $25 coupon on Restaurant.com to a cute Italian place for $2.  With the coupon our $55 Friday night dinner only cost $30.  If you like dining out, and trying new places, I’d suggest checking out Restaurant.com.  For more information, or to see which restaurants offer coupons in your area, click here or on the image above.

Written by J.P. Wicklein

          By setting up a custodial IRA for your teenager, and contributing to it regularly until they graduate college, you can make your kid a millionaire.  Here are the details:

Step 1:  Get your kid a job

     To contribute to a custodial IRA a child needs to have “earned income” – either through a W-2 or self-employment.  Put every penny they earn, up to the $5,000 cap, into a custodial IRA.  Technically you can allow them to keep the money they earn and use your own money to invest in their IRA.  (The IRS only requires that any annual IRA contributions don’t exceed your child’s earned income.) 

Step 2:  Invest your kid’s earnings in a custodial IRA

     Let’s assume your child earns $5,000 a year through part-time and seasonal work from ages 15 to 22.  If you invest their earnings in a well diversified portfolio of 100% stocks, that earns an average of 7% annually, they would have $52,000 by the time they graduate college at age 22. 

Step 3:  Don’t take any money out 

     If your child never touches their IRA after graduation, either to withdrawal funds or make further contributions, their $52,000 would grow to a whopping $1,000,000 by the time they retire at age 65.  Not a bad return on the $40,000 they earned working a part-time job. 

It gets better

     It’s amazing how $40,000 can become $1,000,000 through the power of compounding interest.  The more time their money has to compound, the more they’ll wind up with.  Which brings me to the title of a follow-up article on Financial Fellow, “How to Make Your 5 Year Old a Multi-Millionaire”.  I’ll be posting that article shortly so be sure to check in from time to time.  Or, you can subscribe to Financial Fellow and receive the article via email – it’s free. 

Photo by:  orangeacid